On January 1, 2016, the NAMS Company leases a fleet of delivery vehicles from Colt Motors, Inc When there was no guaranteed residual value under the terms of the lease, the annual payments required were $60,000 on January 1 of each year, beginning on January 1, 2016, over a four-year term. Now assume that there is a guaranteed residual value of $14,000 specified in the contract. The delivery vehicles have a useful life of eight years and NAMS depreciates similar vehicles owned using the straight-line method. NAMS's incremental borrowing rate is 9% and the 7% implicit rate in the lease is known to the lessee. The vehicles cost Colt Motors $200,000 and have a fair value of $217,459. Colt has no uncertainties as to future costs and collection. The lease terms do not contain a transfer of ownership and there is no bargain purchase option. Assume that there are no executory costs related to the lease agreement.
a. Compute the annual rent payment needed to ensure that the lessor company recovers the fair value of the vehicles.
b. Compute the present value of the minimum lease payments using this new payment. The present value of the guaranteed residual value is: The present value of the payments determined in Required a is: To determine the present value of the minimum lease payments we will add the present value of the guaranteed residual value to the present value of the annual lease payments.
c. Prepare the amortization table required for the entire term: step for c
Date Payment Interest Principal Balance
(a) (b)=prior period bal x 7% (c) =(a) – (b) (d)=prior period bal – (c)
1/1/2106 $217,459
1/1/2016
Next complete the amortization schedule for the January 1, 2017 payment:
Date Payment Interest Principal Balance
(a) (b)=prior period bal x 7% (c) =(a) – (b) (d)=prior period bal – (c)
1/1/2016 $217,459
1/1/2016
1/1/2017
Next calculate the interest portion of the January 1, 2018 payment by x the prior period lease balance by 7%
Date Payment Interest Principal Balance
(a) (b)=prior period bal x 7% (c) =(a) – (b) (d)=prior period bal – (c)
1/1/2016 $217,459
1/1/2016
1/1/2017
1/1/2018
Next calculate the interest portion of 2019 payment by x the prior period lease balance by 7%
Date Payment Interest Principal Balance
(a) (b)=prior period bal x 7% (c) =(a) – (b) (d)=prior period bal – (c)
1/1/2016 $217,459
1/1/2016
1/1/2017
1/1/2018
1/1/2019
One last time, calculate the interest portion of the December 31,2019 payment by multiply the prior period lease payment by the 7% borrowing rate, and then subtract that interest amount from the guaranteed residual value to determine the principal portion of the payment.
Date Payment Interest Principal Balance
(a) (b)=prior period bal x 7% (c) =(a) – (b) (d)=prior period bal – (c)
1/1/2016 $217,459
1/1/2016
1/1/2017
1/1/2018
1/1/2019
12/31/2019